Who Wins in This Asset Sell-Off?

Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Editor's Note: Koninklijke Philips N.V. is Dutch, not Danish. This version has been corrected.

According to multiple sources, General Electric (NYSE: GE) is putting together a multi-part asset sale with a total value of nearly $3 billion. The asset basket in question consists of two principal components: two real estate tranches valued at about $2.3 billion in the aggregate and a $550 million auto fleet. Although the sale of the company's Canadian auto fleet has plenty of interesting implications for investors across North America, the offloading of the real estate assets to American Realty Capital Partners (NASDAQ: ARCP) might be even more exciting. 

Indeed, the New York-based REIT has made no secret of its desire to obtain this basket of assets. It contains plenty of high-quality commercial properties, including hundreds of standalone restaurant franchise locations that are currently operated by well-known companies like Wendy's (WEN - NYSE), Burger King (BKW - NYSE) and Jack-in-the-Box. As such, it permits American Realty  to adhere to its "single-tenant" strategy while reducing its reliance on big-name corporations that resist long-term leases. Investors who aim to earn income in the red-hot REIT space without exposing themselves to questionable financial instruments or risky mortgage portfolios may wish to take a closer look at this situation.

About GE, ARCP and the Competition

American Realty competes with a number of REITs that own baskets of commercial properties in high-visibility locations. It is important to note that GE's business model bears very little resemblance to that of this small-footprint REIT. This is most jarringly illustrated by the two companies' respective headcounts: American Realty's eight-person New York office looks positively cozy in comparison to GE's 300,000-strong global workforce.

As such, it might be useful to compare these two companies against a firm that adheres more closely to GE's business model. Although it is much smaller than GE, Dutch industrial conglomerate Koninklijke Philips N.V. (NYSE: PHG) is a good candidate for such a comparison.

General Electric has a market capitalization of over $240 billion. This compares to a valuation of about $25 billion for KP and about $2.4 billion for American Realty. Unsurprisingly, GE's revenue and income figures are both substantially higher than the corresponding numbers for the two other firms. Its 2012 earnings of $15.1 billion came on revenues of $145.6 billion. For comparison, KP earned about $272 million on revenues of $32 billion. American Realty reported a loss of $140 million on revenues of just over $50 million. However, this seemingly abysmal figure is expected to improve with this blockbuster purchase.

American Realty is taking on a substantial amount of debt to finance this deal. The company has about $900 million in debt on its books to offset a cash load of just over $50 million. For comparison, GE has debts of just under $400 billion and cash reserves of just under $90 billion. KP has debts of about $6 million and cash reserves of around $4 billion.

How the Deal Would Work

This deal is relatively complicated. According to the release that accompanied its announcement, American Realty will purchase two separate baskets of real estate assets from GE. The first is an $800 million set of single-tenant commercial properties that will fall under the direct control of ARCP. The second is a $1.45 billion basket of similar assets that will be managed by American Realty-controlled American Realty Capital Trust IV.

Simultaneous Moves

Most of the legwork for these acquisitions is expected to be completed by the middle of the summer of 2013. According to American Realty's announcement, the company will finance the purchases with a combination of equity sales and financing vehicles. Since most of these properties are already leased out, American Realty will immediately begin earning income as a result of the deal. This will benefit investors who have thus far been less than pleased with the REIT's performance. In fact, it could create a knock-on effect that endears American Realty to fund managers and other income-seeking market players.

Does American Realty Capital Benefit?

These simultaneous deals present a classic win-win situation for GE and American Realty. While GE continues to unwind its complex and liability-laden financial arm, American Realty will more than double in size and benefit from an infusion of income-producing assets. It will also diversify its core commercial real estate portfolio by reducing its reliance on major corporate tenants. In fact, American Realty recently released a telling statistic: After this deal has been executed, its reliance on these so-called "top tenants" will drop from a worryingly high 82 percent to a manageable 40 percent.

Good or Bad for Investors?

At this point, it seems obvious that these moves will benefit rank-and-file American Realty investors. Compared to its peers, American Realty previously had a mediocre asset portfolio that simply was not adequately diversified. By the end of the summer, the company will have a healthy basket of assets that could outperform the market over the long term. It is worth reiterating that this tranche is heavy on standalone restaurant properties in high-traffic suburban environments. As the economy continues to improve, rising revenues at these institutions might permit American Realty to renew their leases at higher rates. Of course, this will benefit American Realty's shareholders.

In sum, income-seeking investors would do well to take a closer look at American Realty. With the imminent closing of two major property acquisitions, the company is poised to boost its income and turn a steady profit. Although the deal itself has many moving parts and might be difficult for laypeople to grasp, it is not difficult to determine its probable outcome. Over time, American Realty's boldness could prove to be quite lucrative for its shareholders.


Mike Thiessen has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus